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May 25, 2017
Ontario’s Financial Accountability Office Finds That “Fair Hydro Plan” Has a Net Cost of $21 Billion
On May 24, 2017, Ontario’s Financial Accountability Office (FAO) published its Assessment of the Fiscal Impact of the Province’s Fair Hydro Plan. This Assessment reviews how Ontario’s Fair Hydro Plan (FHP) will impact electricity ratepayers and provincial finances. As set out in its press release, the FAO estimates that the FHP will cost the province $45 billion over 29 years, while providing overall savings to electricity ratepayers of $24 billion. This results in a net cost to Ontarians of $21 billion.
As we have described in previous posts (see here and here), the FHP aims to reduce electricity bills for Ontario consumers by 25%, effective July 1, 2017. This will be accomplished through a number of measures, including the removal of the provincial portion of HST from electricity bills, moving the costs of the Ontario Electricity Support Program and Rural or Remote Rate Protection to the tax base and refinancing a portion of the Global Adjustment (GA) to be recovered over a longer term.
The FAO’s Assessment of the FHP was prepared in response to a request from a member of the Ontario Legislature. It reviews the FAO’s estimate of the fiscal impact on the province and electricity ratepayers over 30 years.
The FAO calculates that under the FHP, ratepayers will save $24 billion versus the status quo over 30 years – this amount is the difference between savings from removing part of HST and the cost of support programs from electricity bills compared to the costs to ratepayers of refinancing the GA. The FAO confirms what is already known, which is that the refinancing of the GA will save money for current ratepayers, but will cost future ratepayers more (because they will have to pay deferred GA costs, along with financing costs). As noted by the FAO, average electricity bills are projected to decrease by 25% in 2017 and will only increase by inflation until 2021. However, after that time, electricity bills are projected to increase by an average of 6.8% annually until the end of 2027 and then after 2027, electricity bills are projected to be an average of 4% higher under the FHP than the status quo. The FAO’s illustration of the drivers of the changes in electricity bills is reproduced below:
From the Province’s perspective, the FAO concludes that the FHP will cost Ontarians $45 billion. This represents the foregone revenue from removing the provincial portion of HST from electricity bills ($42 billion) and the costs of funding electricity relief programs ($3 billion). In coming to this conclusion, the FAO notes that while ratepayers will benefit from not paying HST or electricity relief program costs, this does not represent a savings to Ontarians since tax revenues will be reduced and relief programs will be funded from other tax revenues.
In total, the FAO concludes that the net cost of the FHP is $21 billion, which represents the difference between the ratepayer benefits and the costs to the Province.
The FAO’s Assessment includes a caution that the costs of the FHP may turn out to be higher than forecast. This could happen where interest rates are higher than expected (increasing the GA refinancing costs), or where the Government has to borrow (and incur interest costs) to replace the foregone revenues from removing provincial HST from electricity bills. Where these things occur, the net costs of the FHP will be higher.